Mortgage Options for Self-Employed Borrowers

If you're self-employed, you've probably heard that getting a mortgage is harder. It's not necessarily harder, but it is different. The key is understanding how lenders look at your income, and planning ahead where you can.

How lenders usually calculate self-employed income

For traditional loans like conventional, FHA and VA, lenders generally use your tax returns, typically the last two years, to determine qualifying income. They look at:

• Net income after business expenses, not gross revenue
• Certain non-cash deductions that can be added back, such as depreciation
• Whether income is stable or increasing. A decline from one year to the next may raise questions or lower qualifying income
• How long you've been self-employed. Two years is a common standard, though there can be exceptions

Depending on your business structure, the lender may also need business returns, a year-to-date profit and loss statement, and proof the business is active.

The write-off trade-off

This is the part that surprises people. Deductions that lower your taxes also lower the income a lender can use. A business owner who grosses $400,000 but reports $90,000 in net income will usually qualify based on something close to the $90,000, after allowed add-backs.

If you're planning to buy in the next year or two, it may be worth talking with your CPA and with me about how your filing strategy affects qualifying. I'm not a tax advisor, so that conversation should include your CPA.

Alternative documentation loans

For borrowers whose tax returns don't reflect their true cash flow, some lenders offer non-QM (non-qualified mortgage) programs. Common types include:

Bank statement loans

Income is calculated from 12 or 24 months of personal or business bank deposits, usually with an expense factor applied for business accounts.

Profit and loss statement loans

Some lenders use a P&L prepared by a CPA or tax preparer, sometimes with supporting bank statements.

Asset-based loans

Qualifying based on significant liquid assets rather than income.

DSCR loans for investment properties

For rentals, some loans qualify based on the property's rental income. See DSCR loans for investors.

Trade-offs of non-QM loans

• Rates and fees are often higher than conventional loans
• Down payment requirements are usually larger
• Guidelines vary significantly between lenders
• Prepayment penalties may apply on some products, especially investment property loans

These loans can be very useful, but they're not automatically the right answer. Sometimes a traditional loan works fine with the right documentation, and it's worth checking first.

Tips to prepare

• Keep business and personal finances separate. Clean bank statements make everything easier.
• File taxes on time and have both years available.
• Track your year-to-date numbers. A current P&L helps.
• Be ready to explain any big swings in income or unusual deposits.
• Talk to me early, ideally before you file, if you're planning to buy soon.

An example

These numbers are for illustration only. A self-employed designer has two years of tax returns showing $70,000 and $85,000 in net income, but their business bank account shows about $20,000 a month in deposits. With a traditional loan, qualifying income would likely be based on the tax returns. With a bank statement loan, it might be calculated from deposits after an expense factor. The bank statement loan might qualify them for more, at a higher rate and with more down. Comparing both helps them decide.

Questions?

Self-employed files often benefit from shopping across lenders, since each one reads income differently. contact me to talk through your situation, or start your pre-approval.